The past few years have not been as kind as tonight's occasion, for they have focused not on the successes but on the failures of the business community. Instead of dreams, they have given us nightmares.

As you know, financial events in the last three years have raised questions about the role of modern-day managers and the board of directors. It feels as if we have been watching a new "Matrix" movie, and in this mixed-up world the purpose of management has become the transfer of wealth from shareholders and creditors to managers, and the board of directors has agreed to this brave new corporate world. It is time to wake up from this nightmare and to reaffirm the orthodox belief that managers are stewards of the business enterprise and that directors serve at the behest of stockholders and not to help managers steal the resources of the corporation. In other words, it is time to dream good dreams for the business enterprise and for the investment community.

Before we can turn these nightmares into dreams, I think three things must take place. First, we must admit the mistakes and seek to change the system. Second, we cannot rely on structural changes but must instead rely on real changes. And third, we need a cultural shift that affects our way of thinking about business and that produces detrimental consequences to those who transgress the norms of the system. 

Admit mistakes and seek to improve the system
We all know of the various scandals at Enron, WorldCom, Global Crossing, AOL, Sprint, Xerox, Rite-Aid, and Computer Associates, to name a few. What I find amazing is that so many people in the business community have referred and continue to refer to these problems as "just a few bad apples." I don't know about you, but when over one thousand (one THOUSAND!) companies restate earnings because of misapplied accounting rules and the overly aggressive estimates that they employed, that is not "just a few bad apples." And when the stock market loses $8.5 Trillion (with a T!) dollars in equity because of less than honest accounting reports, that is not "just a few bad apples." Heck, that's not even just a few bad apple trees. It seems the whole apple orchard is infected with some disease!

The problem of delimiting the issue to "just a few bad apples" is that those who make the claim are really just trying to blame somebody else. Worse, by avoiding any admission of guilt to this insane game of earnings management, such individuals likely will refuse to make any major corrections to improve things.

Consider the Powers report, for example. This is the report that a committee from Enron's board of directors wrote after that firm went bankrupt. The members of this committee meticulously record some of the more egregious acts of Kenneth Lay and Jeff Skilling, but they inadvertently provide evidence that the board was not on top of its game during the waning years of this fiasco. Lay and Skilling asked the board to set aside the firm's code of ethics so it could set up some of their now infamous special purpose entities. Incredibly, the board agreed. Lay and Skilling told the board about the LJM special purpose entity that was supposed to hedge a particular gain on an investment with Enron's own stock. the board acquiesced to this proposal, even though it should have known that the hedge was bogus. In addition, the board knew or should have known about the incredible conflicts of interest that were created by putting Andy Fastow, an Enron officer, in charge of these special purpose entities. This Board had the dean of the Texas law school and a former dean of the Stanford Business School, who also was a professor of accounting. Additionally, the board had the wife of a powerful Senator, and she also served on the Business Roundtable. What in the world were they thinking when Lay and Skilling pitched these ideas to them? How could a board with so much talent fail in its oversight duties?

A more recent example concerns Tyco, which has had numerous accounting scandals of its own. As you will recall, Tyco took an additional $382 million charge for the fiscal year ending September 30, 2002, for accounting errors. The board of directors hired David Boies to head up a committee to investigate the accounting issues of Tyco. Incredibly, the Boies report filed with the SEC on December 31, 2002 states that Tyco managers engaged in "aggressive accounting" but found no evidence of "significant or systemic fraud." Such a finding smells peculiar for two reasons. The report admits that the authors did not closely examine the accounts; so how do they know that there was no "significant or systemic fraud"? More important, fraud consists of doing or saying something to entice others to do something that they otherwise would not do to obtain some advantage. Tyco's previous management employed very, very aggressive accounting procedures in its financial statement to entice investors and creditors to bid up the company's stock prices. Managers benefited by the increased value of their stock shares and their stock options, which some sold at lofty profits. That sounds like accounting fraud to me. The unwillingness of this committee to find a connection between "aggressive accounting" and "accounting fraud" implies that Tyco may very well return to its use of "aggressive accounting" and not worry very much whether it slides into "accounting fraud."

The Boies report is one reason that I remain pessimistic about corporate America. It is time to come clean. Instead of whitewashing the issue, more managers and directors should admit their role in these accounting games and then seek to improve their firm's financial reporting. No real improvement will come unless these admissions come first. Even then, we shall need some deep changes rather than cosmetic changes.

Structural changes will not suffice
To correct the perceived deficiencies in corporate governance, Congress, the New York Stock Exchange, and a variety of groups and organizations have created a number of proposals. Some of these ideas have been incorporated into the Sarbanes-Oxley Act of 2002. Others may be institutionalized in other ways. Such ideas include (1) requiring a majority of directors to be independent of managers, (2) requiring the compensation, audit, and nominating committees to have only independent directors as members, (3) requiring the independent directors to meet regularly without any manager present, (4) allowing shareholders that represent (say) at least 5% of voting shares to be able to put forth their own slate of directors, and (5) splitting the positions of CEO and Chairman of the Board. While such ideas have a certain appeal, generally they only address structural issues. Because of this, most of these ideas will have limited effect for improving corporate governance.

Consider, for example, the Sarbanes-Oxley requirement that a majority of the directors be independent. That sounds great, and is indeed a better situation than if the board consists mostly of managers. After all, if the board consists mostly of corporate managers, then they will simply approve their own decisions as managers. There is no additional layer protecting the shareholders and one might as well dismiss the Board in such cases. However, requiring a majority of the directors to be independent might not work either. For example, a majority of Enron's board was independent, and it didn't help the corporation or its shareholders. Having independence does not necessarily bring about any oversight or independent thought. Enron's directors may have been independent, but they still rubber-stamped whatever Lay and Skilling proposed.

Consider also the idea of splitting the roles of CEO and chairman. For example, the British did this after publication of the Cadbury Report in 1992. Around that time a wave of corporate scandals hit Great Britain, and the government created a task force chaired by Sir Adrian Cadbury. Among other things, the committee's report recommended that the CEO and the chairman of the board of directors be different individuals. Since then, nearly every British corporation has separated these two posts. While I think this idea has merit because it avoids giving one person an excess amount of power, I again return to the example of Enron in which Lay was the chairman and Skilling was the CEO. It didn't help Enron or its shareholders.

I do not want to denigrate these ideas and the many others that are being debated these days, but I also think we should not overrate their effectiveness in creating fewer corporate scandals. Structural changes have useful but limited effects.

This analysis is further bolstered by a recent survey conducted by PricewaterhouseCoopers. PwC surveyed 200 senior executives in the financial services industry about corporate governance today. These executives stated that the firm had improved its relationships with regulators and auditors but not with shareholders, employees, or customers. PwC interpreted these results as showing that business enterprises have changed what they do to comply with the new rules and not to improve corporate governance. PwC goes on to argue that corporate managers should strive to improve the quality of their relationships, especially with shareholders. Confidence in the system stems from trust, not mere compliance.

Structural changes as we have mentioned here are important. Having independent directors is better than having managers as directors to provide an opportunity for oversight, but we must remember that it is no guarantee that oversight really takes place. For that we must hope for a better corporate culture.

Cultural change is needed
Many have called for an improved corporate culture, including former SEC Chairman Arthur Levitt in his famous "The Numbers Game" speech. However, I agree with Harold Tinkler, the ethics officer for Deloitte & Touche, that a real change in corporate culture must include consequences for those who violate the cultural norms of trust, transparency, and honesty. Only a cultural change that has teeth will have any chance to reduce the probabilities of seeing scandals such as Enron and WorldCom and Global Crossing re-occur in the near future.

A lot of things are packed into the concept of a good corporate culture. One would begin with overarching ideas such as practicing active ethics in all aspects from the top down and displaying respect for investors and creditors and financial analysts. Drilling down, a good corporate culture with respect to accounting and financial reporting issues would include a disposition to disclose things to the shareholders rather than hiding the information. I think it would also include managing the business with a long-run focus, rather than worrying so much about quarterly earnings. When that concern overtakes the notion of maximizing long-run shareholder wealth, then managers focus on the wrong things and have perverse incentives to do some very foolish things. Of course, a good corporate culture would also let auditors do their job rather than pressuring them to permit some aggressive accounting measure or harassing them about the audit fees.

Managers must become ethical in how they treat financial reports and how they treat the investment community. While external forces are required to put pressures on managers and directors, these corporate officers must hold the line. And since the directors oversee the activities of managers, they are our final defense against corporate shenanigans and so must have the courage to do the right thing. In particular, when it comes to financial reporting, these managers and directors need to embrace their partnership with shareholders -- their capital customers -- and actively practice telling the truth, the whole truth, and nothing but the truth.

I cannot overemphasize the need to have consequences for those who abuse the system. When corporate managers or directors cook the books or allow others to do so, we must punish them. This requires a system of justice that catches managers who do these things, and prosecutes them, and metes out an appropriate punishment that includes some time in prison. Remember that a $100,000 fine for some of these folks is like you or me getting a speeding ticket. Losing a little bit of spare change will not stop such folks from corporate misconduct. Significant time in prison for those who have robbed us of our retirement funds, however, will provide great incentives for other managers not to follow suit. For a change in corporate culture to succeed, such consequences for dysfunctional behavior are a must.

Conclusion
In conclusion, until the business community views accounting scandals and mutual fund scandals and any other corporate scandals as disgusting and reprehensible, we shall see them again. We can have a brighter tomorrow, including a stock market in which investors don't have to be so cynical and so suspicious. But, it will require some managers and some directors who become trustworthy.

So which kind of world would you like to live in? Would you like to read financial reports and make investment decisions based on them, knowing that at least you can rely on the written assertions? Or do you prefer to live in a world where words and numbers don't mean much and where annual reports are only good for starting your wood stove?

You can make a difference. You have proven your abilities and skills in the classroom, and you will be entering the business world soon. My challenge to you is that you become just as much a success in the world of business ethics as you have been a success in the classroom. If you want to make this a better world, then make your world a better world. You can treat your colleagues and your superiors and your customers with respect and with honesty. And you can resist the efforts of others to bend just a little.

If you live this way now, then when you become a manager or a director, you can provide the moral leadership that the world will need. I wish you much success.

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle for SmartPros.com.